Dyadic International Inc (DYAI) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for holding. Welcome to the Dyadic third quarter 2010 financial results conference call. At this time all, participants are in a listen-only mode. My name is Sara, and I will be your conference coordinator today. As a reminder, please note that this call is being recorded. At this time, I would like to introduce your host for today's call, Adam Morgan, Dyadic's Vice President and General Counsel, and Business Development.

Thank you, Sara. Good morning, everyone and thank you for joining us on today's call, during which we will be discussing Dyadic's third quarter financial results, which were reported this morning in a press release. If you have not had a chance to review Dyadic's third quarter financial statements prior to this call, they are available on both the Dyadic and Pink Sheet's websites. As we have stated previously, Dyadic is not required to hold quarterly conference calls, but following the strong participation and positive feedback we received on last quarter's conference call, we have decided to continue holding these calls on a quarterly basis. With me today are Mark Emalfarb, our Chairman, President, and Chief Executive Officer, and Michael Faby, our Vice President of Finance.

The agenda for today's call is as follows. First, Mark will review highlights for the third quarter of 2010, and provide some comments and updates on Dyadic's overall business. Mike will then review Dyadic's financial results for the third quarter of 2010. And then we will open up the call for your questions. The operator has been instructed to limit each caller to one question and one follow-up question, in order to provide all callers an opportunity to participate. If time permits, the operator will allow additional questions from those who have already spoken. Before we would begin, we would like to remind you that certain statements made in this conference call may be forward-looking statements, which involve risks and uncertainties that could cause Dyadic's actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Except as required by law, Dyadic expressly disclaims any intent or obligation to update any forward-looking statements. I will now turn the call over to our Chairman, President, and CEO, Mark Emalfarb.

Good morning, everyone, and thank you for joining us on today's call. During the third quarter of 2010, we continued to see improvements in sales of our industrial enzymes, and we remain actively engaged in the discussions with multiple parties, regarding potential research and development, licensing, and other strategic collaborations. Of great importance during the third quarter was that Dyadic successfully raised $4 million through the private placement of convertible subordinated secured promissory notes to certain investors. We raised this capital in order to provide the Company with additional flexibility and security in running it's business, while we continue to pursue revenue generating opportunities.

In making the decision to raise capital, we devoted particular time and energy to ensure that the amount we raised, in the terms of the transaction, would be the least dilutive alternative for our stockholders. Dyadic's business continues to focus on three core areas. First, the licensing of our C1 platform technology and our other technologies, primarily in the areas of biofuels and biopharmaceutical applications. These applications offer some of the greatest and nearest potential financial opportunities for Dyadic, because of the relative size of those markets, and the clear need for technological solutions in the energy and pharmaceutical industries, which Dyadic's technologies can help address.

In addition to our many smaller but still substantial market needs, besides biofuels and biopharmaceuticals, with Dyadic's licensed technologies, as an enzyme expression of a protein expression system, which can potentially help companies develop new products, and/or improve yields of enzymes, in order to lower costs and improve their margins. Our second core area of focus is conducting research and development projects, which often consist of proof-of-concept studies funded by third parties, and in some instances co-funded by Dyadic, in order to determine whether Dyadic's technologies can produce meaningful results for our mutual businesses. If these research projects are successful, and they often lead to licensing and other strategic collaborations, which is how Dyadic's relationships with it's licensee, Abengoa Bioenergy evolved as one example. Our third core focus area is the sale of industrial enzyme products to multiple industries, including animal feed, pulp and paper, starch and alcohol, and textiles.

I will now share a few comments and updates with each of these three areas. Biofuels, in the biofuels area, our primary goal continues to be in developing novel fungal strains for production of enzymes that will produce the greatest amount of sugar from plants or biomass as it is called, at the lowest cost so that these sugars can then be fermented into fuels, polymers, plastics and chemicals affordably. During the third quarter, our research and development team in Holland developed a seventh generation of C1, which we call G7, in which our research indicates that is more efficient in releasing sugars from biomass than prior C1 strains.

We are also continuing to engage in discussions with numerous companies, many of whom visited our research and development facility in Holland, as part of the validation of our technologies, and becoming familiar with our research capability. Having just returned from attending the Advanced Biofuels Market conference in San Francisco last week, I can tell you that the optimism in the industry is growing, and there are certainly plenty of opportunities for Dyadic in this area.

We are starting to see greater focus in investment, especially by some of the larger oil and gas companies in Brazil, which I think is universally seen as the mecca of biofuels development, based on it's abundant source of sugar cane bagasse, as a feedstock which is a waste stream produced from sugar cane. With regard to our current licensees, Abengoa and Codexis, they have reported continued progress in using Dyadic's C1 technology towards commercialization of cellulosic ethanol. And in some cases, have been generous in sharing this information publicly in conference calls and in industry conferences.

In the biopharmaceutical area, Dr. Mark Alfenito at EnGen Bio, Inc., our prospective licensee of C1 for biopharmaceutical applications under a non-binding term sheet, continues to discuss potential dilutive and non-dilutive funding opportunities of EnGen Bio with major investment banks, as well as a number of potential corporate and institutional investors. EnGen Bio, like Dyadic, is being careful to secure funding that is least dilutive, but also must balance it's concerns with the timing necessary to raise these funds, so that EnGen Bio can launch it's operations as soon as possible. If you have not had an opportunity to hear those presentations, they are still available on Dyadic's website.

Additionally, EnGen Bio just recently learned that it was awarded a cash grant of about $250,000 under US government's qualifying therapeutic discovery project program, which it should receive around the first of the year. While biofuels and biopharmaceuticals represent the two largest market opportunities to which we can leverage Dyadic's technologies, we've also engaged in discussions with companies in other industries, which expressed interest in using our C1 technology as an expression house. Of course, as with all pending opportunities, there can be no guarantee that these efforts will be successful. But we continue to diligently pursue them, and keep you posted on our progress as appropriate.

Research and development, in the research and development area, we are currently in advanced discussions with several companies, who want to sponsor research collaborations with Dyadic, to see if through our technologies, they can generate higher quantity of certain key proteins and enzymes, in order for them to reduce the cost of goods, develop new products, and increase their margins, as well as launching new products.

As I mentioned earlier, these types of research collaborations not only have the potential to produce research revenue to Dyadic, but if successful, can also evolve in a licensing and other strategic collaborations which can provide additional revenue to Dyadic, as well as continue to provide Dyadic and it's technologies, with additional credibility in different industries. As with biofuels and biopharmaceuticals, it is our objective to enter into selective research and development agreements, licensing and other strategic collaborations, in order to continue monetizing Dyadic's technology for the benefit of Dyadic and it's stockholders.

Enzyme business, in our industrial enzyme business, sales during the third quarter were up approximately 15%, which is consistent with the year-to-date increase in sales, as we gain new customers and existing customers continue to resume the traditional ordering patterns. We have also streamlined our product offerings, and eliminated older inventory, in order to focus on products with higher margin product margins, which can be seen in the increase of our gross margins.

We expect that as the global economy continues to recover, and as our VP of Sales and Marketing who joined Dyadic in May, continues to get further entrenched in the business, we expect to see continuing improvement by adding new customers and new products which are on development -- under development, as well as enhancing our existing products and new applications. In summary, we are continuing to work more efficiently to prioritize the opportunities that we provide, and will provide the greatest benefit to Dyadic and it's stockholders, and we remain very encouraged at our prospects for future growth in all our business areas. I will now turn the call over to Michael Faby, our Vice President of Finance, to take you through the details of our third quarter and year-to-date financial results.

Thank you, and good morning, everybody. Let me start with the third quarter, and the year-to-date financial results. I would like to refer you to our third quarter press release and financial statements which are posted on the Pink Sheets and Dyadic websites. Overall, for the three and nine months ended September 30th, total revenue for 2010 is down from 2009 largely because, while we continue to pursue multiple research and licensing opportunities, we have not yet realized any significant revenues in these two areas in 2010, which largely explains the disparity between this year's and last year's financial results.

The total revenue for the third quarter ended September 30, 2010, as compared to the third quarter of 2009 was essentially flat, decreasing to about approximately $2 million from $2.1 million last year. Total revenue for the nine months ended September 30, 2010, decreased to approximately $6.2 million, as compared to approximately $19 million for the nine months ended September 30, 2009, of which approximately $13 million was related to the Codexis and Abengoa transactions mentioned earlier. Licensing fee revenue for the nine months ended September 30, 2010, decreased by approximately $10.2 million, primarily because of the Codexis transaction just mentioned.

Research and development revenue -- research and development revenue for the third quarter ended September 30, 2010, decreased to approximately $64,000, as compared to $298,000 for the third quarter ended last year. Research and development revenue for the nine months ended September 30, 2010, decreased to approximately $618,000, as compared to approximately $3.9 million for the nine months ended last year, due primarily to the previously mentioned Abengoa transaction. Net product related revenue for the third quarter increased approximately 15% to approximately $2 million, as compared to $1.7 million for the third quarter -- for the third quarter of 2009. Similarly, net product related revenue for nine months ended September 30, 2010 increased approximately 14% to approximately $5.5 million, as compared to $4.9 million for same period a year ago.

Gross margins for net product related revenue, exclusive of shipping and some other costs, for the nine months ended September 30, 2010 increased to approximately 31%, as compared to approximately 22% for the nine months ended September 30, 2009, as a result of the continued focus on more profitable product lines, and improvements to inventory and management and overall operating efficiencies. The increase in general and administrative costs for both the three and nine month period ended September 30, 2010, was due largely to increases in legal, personnel costs, including stock-based compensation and consulting fees, related largely to increase in investment necessary to accelerate our bioenergy efforts on a global basis. As substantially all litigation against the Company has been resolved, a substantial portion of these legal fees are not expected to carry over beyond the third quarter.

Sales and marketing and research and development costs for the three and nine months ended September 30, 2010, remain relatively consistent with the same period last year. The fluctuating euro against the dollar has had a negative effect year-to-date through September 30th of $138,000. However, we recognized a foreign currency exchange gain of approximately $123,000 in the third quarter. The net loss for the third quarter ended September 30, 2010, was approximately $1.4 million or $0.04 per basic and diluted share, as compared to a net loss of approximately $654,000 or $0.02 per basic and diluted share for the third quarter ended September 30, 2009. Net loss for the nine months ended September 30, 2010 was approximately $3.9 million or $0.13 per basic and diluted share, as compared to a net income of approximately $10.2 million or $0.34 per basic, and $0.31 per diluted share for the nine months ended September 30, 2009.

We are providing no specific guidance on this conference call with regard to future financial results. At September 30, 2010, unrestricted cash and cash equivalents were approximately $5.9 million, as compared to approximately $8.4 million at December 31, 2009. A large portion of this decrease in cash and cash equivalents was due to costs incurred by Dyadic to resolve stockholder -- to resolve the stockholder class action lawsuit. Cash and cash equivalents during the quarter were positively affected by, as Mark mentioned, the private placement of Dyadic -- by Dyadic, of an aggregate principal amount of $4 million of convertible subordinated secured promissory notes.

We believe that our current working capital is sufficient to fund the Company's operations for the foreseeable future. While we realize that significant changes in future financial results will largely be driven by new licensing deals and other revenue generating collaborations, we continue to anticipate that new product launches and other improvements in our industrial enzyme business will also contribute to future revenues as well. Finally, in continuing to maintain adequate internal controls, we are also making certain improvements that will be necessary, if and when we deem it appropriate to become an SEC reporting Company, and gain listing on a national stock exchange. At this point, I would like to turn the call back to our operator to take your questions.

Thank you.

(Operator Instructions).

Our first question comes from Richard Deutsch with Ladenburg Thalmann.

Yes, hi. Good morning. Thank you for holding this conference call. It's a very helpful to people trying to assess what's happening. I want to ask about your licensing, because you are a technology Company, and most of the value is in the technology, and how we can get more people to license it. What are the impediments that you see to getting another licensing deal done?

I don't believe there are any impediments to getting a deal done. It's a matter of the terms and conditions of those deals.

Okay. So you're just saying, you're just negotiating over price? There is just nothing else that you see as holding back the potential buyers, not industry concerns or political concerns or anything else?

We have a variety of opportunities in different stages of discussions, and it all relates to more or less terms and conditions of what the licenses are, the field of use, and of a variety of other terms that go into those things.

Okay, thank you.

(Operator Instructions).

Our next question comes from [Herb Styles] with T. Rowe Price.

Good morning, Dyadic and good morning, Mark.

Hi, Herb, how is it going?

Just fine. Mark, it seems to me that Dyadic's prospects are paced by the pace of the industry. And by that I'm thinking of biofuel and biopharmaceutical applications. Can you tell us some of the most important developments you've seen since your last call, that we should focus on as the things that are kind of setting the pace, that are leading the way in the areas that you're expecting to incur most of your revenue from?

Yes. Let's start with the biofuel industry. I just attended the Advanced Biofuels Market Conference in San Francisco last week. And I would say that it was a very upbeat conference. I think there was -- according to I think it was Jim Wayne -- I think it's Jim Wayne who heads the Biofuels Digest, who helped put on the that conference, there was 260 people in the room, and it represented over 90% of the American biofuel industry. So those are his comments, not mine. So I don't know if they're accurate or not.

But I can tell you there were a lot of leading people in that room, including Alan Shaw of Codexis, one of our licensees, who made a presentation on his technology, and the advances of his technology, and how C1 embedded in that, is helping them make tremendous progress in their relationships with Shell. And it seems that if you seen the recent announcements by the oil companies and some of the others, that some of the acquisitions in Brazil, and the expansion of some of these efforts, I think that the industry is focused on trying to turn cellulosic sugars into fuels, chemicals and plastics and polymers. And we're in the thick of things. So we're trying to create value here as best we can, under the right terms and conditions for Dyadic, and as well as providing significant technology and opportunities for our licensees.

So Abengoa is also progressing very nicely on their programs from what we understand, and hopefully at some point in the future we'll share that with everybody. And the biopharmaceutical industry, I did meet with Mark Alfenito in San Francisco, and things are moving very well. As we announced, he did get a $250,000 grant for EnGen Bio, for using C1 to develop a protein. And he's in a myriad of discussions with pharmaceutical companies and corporate venture groups, as well VCs and others to fund EnGen, to see if we can't get that off and running. So there seems to be a lot of bottlenecks in the pharmaceutical industry that we can help try and solve. And I think Mark is the guy to do that, and using C1 as a tool to do that with.

So and then we have a variety of other discussions going on, in a variety of other industries which I don't really want to disclose, with a whole variety of customers that have needs to overexpress genes to make products, to either to make them launch new products, or to drive the costs down of their existing products to help them maintain the market shares and their profitability. So I I'd say there's a lot of opportunities there. And we're very excited to be in the middle of that, and a lot is being driven by, let's say, larger forces, governmental forces. But I think as the economy grows, and as the biotech industry continues to expand, they need more genes turned into more proteins, and we've got the tools to help people do that. So, we're excited about that.

Thank you.

(Operator Instructions).

And we now have a follow-up question from Richard Deutsch with Ladenburg Thalmann.

Yes, hi. One other question, you already have licensing deals with both Abengoa and Condexis. And from what they're saying, as you mentioned Mr. Shaw, and what appears to be happening at Abengoa, they seem to be continuing to progress quite strongly with your technology. What's the outlook for future revenues from your existing licensees?

I think the outlook is up to them when they're going to launch their products. And I'm not free to discuss things they've discussed with me, in terms of when they're doing that. So I would suggest, if you want to know the outlook of when Codexis is going to begin commercialize something, that you listen to their conference calls, and you look at the information that is publicly available from them, and the same thing about Abengoa. So those are my suggestions. And as I mentioned in the earlier discussion today, is that we are continuing on our own efforts to continue to improve C1 to make sugars at a more affordable price. And we've just announced today that our G7, which is our seventh version has been improved versus G5 and G3. And we continue to make our own progress, and we're working with others on a variety of opportunities which we hope in the future to be able to share with you.

All right. So what your saying is, if either of those companies launch products, you'll receive revenues? Are there any other interim payments that would happen maybe prior, such as a facility fee that I saw mentioned in some of the documents?P

We're again, under confidentiality with both of those parties, and are not free to discuss you, the revenue streams and milestones, and other payments that may or may not come down the road. But there are definitely other payments coming if and when they commercialize it. And we're looking forward to that happening sooner than later. And we'll do whatever we can to help them get there sooner than later.

All right. Thank you.

Our next question comes from [Jason Dipaola] with Central Park Capital.

Hi, Mark, how is it going?

It's going good, Jay. How about you?

Well, you just kind of answered my question. I was going to say, I did listen to the Codexis call. And they mentioned that they had hit seven of nine milestones. And quote, unquote, what Alan Shaw said was, "the proprietary expression system of C1", which I thought was interesting since it's yours. So since they've hit those milestones, you have just said that you can't disclose how that would flow back to you. So I guess that kind of defeats the purpose. But is there anything you can expand upon about the relationship, the fact that they're making this kind of progress?

Well, as I mentioned, I was just at the Advanced Biofuels Conference in San Francisco. And if you liked what he said on the conference call, you would have loved that. So hopefully at some point that will become available for you guys to listen to.

Yes, I'm just curious again, if they do hit these milestones, are there revenue look backs to you guys?

Again, there are payments coming down the road, if and when they commercialize products, at what stages those come in. And products in their case, they are not just fuels, but they are also plastics, chemicals, and polymers, and other opportunities. So we're hoping that Codexis adopt the C1 system as it's own, advances it, and continues to make great progress. And we'll do whatever we can to help them do that. It's a great company, they are making, from what they're reporting, tremendous progress on the science. And we're happy to be a part of what they're doing. So we're just part of a big picture of what they're doing over there. And we're happy to be a part of that.

Got it. I appreciate it, Mark.

I am showing no further questions at this time, and will now turn the call back to Mr. Morgan for any closing comments.

Thank you, Sara. Ladies and gentlemen, I'd like to thank you for the participating in today's conference call. We sincerely appreciate your interest in Dyadic, and look forward to sharing your full-year 2010 financial results with you in March.

This concludes our program for today. You may all disconnect.